Shen Wan Hongyuan: Leading companies that value positive changes in the steel industry have good upward flexibility

The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that currently the fundamentals, valuation, and institutional holdings of the steel industry are all in the bottom area, and emphasis is placed on positive changes in the industry. Industry mergers and restructuring are also expected to drive future concentration increases, and the overall supply pattern is expected to be optimized. The bank expects a subsequent decline in iron ore prices, which will push steel companies' profits to recover. Overall, at the bottom of the current cycle, the overall profits of leading companies have some support, and there is also good upward flexibility in anticipation of cost improvements.

Shen Wan Hongyuan's main views are as follows:

Supply side

Policy production limits+cash flow pressure on some companies are driving the industry's supply to clear faster. The policy side suggests that in the context of “reverse internal circulation,” steel production removal is the medium- to long-term trend. Energy saving and carbon reduction requirements are expected to speed up the clearance of backward production capacity, and industry mergers and restructuring are also expected to drive up future concentration. It is expected that the overall supply pattern will be optimized.

Demand side

Demand for infrastructure improved marginally in the second half of the year. Combined with demand from the manufacturing industry, there is no need to be too pessimistic. The issuance of special bonds is expected to accelerate in the second half of the year. Demand in the infrastructure sector is improving marginally. At the same time, demand in the manufacturing industry is resilient, so there is no need to be too pessimistic on the demand side.

Cost side

Iron ore prices are falling at the center, and the distribution of profits in the industrial chain is expected to be reasonable. After the Cimandou iron ore was put into operation, the iron ore supply margin was relaxed. At the same time, steel production was adjusted to limit iron ore demand. It is expected that the iron ore price center will fall in the future, driving steel companies' profit recovery.

Investment analysis opinions

According to the bank's analysis, on a comprehensive basis, at the bottom of the current cycle, the overall profits of leading companies have some support, and there is also good upward flexibility in anticipation of cost improvements. From a safety margin perspective, it is recommended to focus on Nangang Steel Co., Ltd., Baosteel, and CITIC Special Steel, which have high dividend rates; at the same time, in the medium to long term, special steel consumed in the fields of energy, aerospace, defense, etc. has also become an important force in steel consumption, so it is recommended to focus on Jiuli specialty materials, which are high-end stainless steel pipe standards, and Yongjin Co., Ltd., which expands production from stainless steel cold rolling to titanium alloy materials.

Risk warning: raw material prices are higher than expected; downstream demand falls short of expectations.